Fletcher in the News

Sovereign Wealth Fund Initiative Research Highlights Role of Islamic Finance

Date: March 7, 2013

Making an Impact may be new good

If the pure pursuit of greed is no longer good in the post-crisis world, what defines the new “good”?

That’s when you start to consider “Impact Investing”, a type of investment that pursues measurable social and environmental impacts alongside a financial return. According to a report prepared for the Rockefeller Foundation, approximately 2,200 impact investments worth $4.4 billion were made in 2011.

But those who may be ideally placed to pursue Impact Investing are still largely absent from the exercise — sovereign wealth funds from the Persian Gulf, according to a recent paper published by academics at the Fletcher School at Tufts University.

Authors Asim Ali and Shatha Al-Aswad at the Sovereign Wealth Fund Initiative at the Fletcher School at Tufts University argue that Persian Gulf states can deploy their SWFs in impact investing, via Islamic finance, to help develop their economies.

Islamic finance, with its focus on moral and social objectives, and specifically Sovereign Wealth Funds, as long-term investors, are ideally positioned to pursue impact investing… to foster social impact and economic development in the broader economy.

At a time when there has been much questioning of the values underpinning the conventional financial system, Islamic finance presents an alternative to traditional finance by offering both financial return, as well as a theoretical foundation for ethical investing, which, we argue, extends logically to investments that directly impact social and economic development.

Governments’ role is key in promoting impact investing, the Rockefeller report says.

Governments can encourage impact investing through appropriate investment rules, targeted co-investment, taxation, subsidies and procurement, as well as corporate legislation and capacity development that enable the efforts of investors, intermediaries and enterprises in this space.